If they’re so rich, why ain’t they smart? Another prelude to the critique of economic theory



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What does Marx offer?


The moving finger writes, and having writ,

Moves on. Nor all your piety, nor wit,

Shall lure it back to cancel half a line,

Nor all your tears wash out a word of it

– The Rubáiyát of Omar Khayyam

The real and the ideal in the world of equilibrium


Happily for relations with colleagues, my immediate research proposal is more limited: it is simply to examine more closely, and with a teensy bit more humility, the work of the man who first suggested that results like those above were likely. It would start from the following: what has the profession, in order to exclude Marx’s insights, excluded from its thinking?

There has been some discussion of scorecards. But so far, the scorecard has been applied only to Marx. Let’s put economics to the test. Let us take a calm look at some of the principal propositions with which – it is not disputed – Marx is associated. Since, as Brewer kindly points out, Marx has no influence on the profession, we trust we can asssert without challenge that it rejects these propositions. Let us see what it chooses to ignore. This includes:



  1. Marx’s critique of Say’s Law, the ‘metaphysical equilibrium of buyers and sellers’ or the form in which the dogma of equilibrium was in his day expressed;

  2. Marx’s ‘dogmatic’ assertion that the free market produces long-term unemployment;

  3. Marx’s critique of both banking orthodoxy and banking reform;

  4. Marx’s critique of the quantity theory;

  5. Marx’s denial of the long-term viability of financial regulation as a substitute for a direct overturn of the market in investment goods;

  6. Marx’s distinction between real and fictitious capital, the basis of his assertion that financial crashes and credit crunches were a necessary product of the market;

  7. Marx’s ‘logically false’ proof that accumulation lowers the profit rate by increasing the value of capital stock leading to periodic accumulation slowdowns;

  8. Marx’s insistence on the endogenous basis for the business cycle – let’s not forget that for thirty years the profession stoutly maintained this cycle had vanished.

  9. Marx’s proof that capitalism unavoidably creates a permanent class of workers and a permanent class of capitalists;

  10. the Marx-based critique of neoclassical trade theory and its proof that growing inequality between nations is a necessary consequence of globalisation;

This strikes me as a pretty useful wish-list for anyone setting out to find out what’s wrong with economics. The question ‘what’s it all about’ can be rephrased like this: Marx offers several clear, empirically-verifiable criticisms of the economic theories of his day; the same dogmatic and doctrinal assertions that led to the catastrophes of his day are endlessly re-incorporated into new theory; these same assertions form the basis of most current policy; Marx’s forecasts of the results remain, a hundred and thirty years later, unbelievably accurate.

Is not possible that the odd economist might benefit from a dispassionate attempt to discover how he reached these conclusions? Is it not relevant to reconstruct the reasoning, the method of enquiry, and the conceptual framework which allowed him to draw these conclusions?


Marx not wrong8: why it matters


I hold a simplistic view of the purpose of debate: it is to criticise one’s own thinking by examining the opposing view. The most fruitful way to debate is to understand what you oppose, which I take to be the scientific method. This is not the reaction of orthodox economics, which approaches its critics, frankly, like a tomb-robber turned trophy-hunter. It seeks only what it can drag back to domesticity and what it cannot subdue it kills, stuffs and mounts to boast of over brandy, savouring the quiet frisson of knowing that were it alone with the live beast in the jungle it would not last an hour.

The prolonged enterprise of showing Marx not merely wrong but ‘inconsistent’ has a very specific function which is insufficiently recognised.9 It is not a ‘normal’ discussion tactic but has a profoundly anti-democratic content. Its function in the debate has been to exclude consideration of Marx’s arguments or evidence.

Marx must be ‘shown’ inconsistent because economics cannot defend its results against his critique, and therefore demands an excuse for refusing to confront his concepts. In fact the best way to benefit from any critique is to understand it in its own terms; this is exactly what economics cannot afford to do, for it would then be plain to the whole world that the entire edifice stands on nothing. It is therefore a serious misunderstanding to construe the interpretation of Marx as doctrinal or hermeneutic and the profession only sees it in this way because its own tradition is doctrinal through and through. At the core of this tradition lies a blank refusal to discuss concepts, substituting models, nostrums, and alchemical equations from which it can derive the missing concepts, for which the sole criterion of acceptability is to make the equations work. Yet it never assesses the object of these frankly superstitious models, nostrums and equations. It never asks what the variables mean.10 Marx does ask what they mean: what better way – indeed, what other way – to duck his questions, than to ‘prove’ his equations don’t work?

Economics is literally the science that does not know what it is talking about. Indeed it is is boastfully proud of this. Though this seems a difficult idea for the profession it is central to this paper. I will illustrate with the two concepts most central to the whole edifice: the labour force and the price level.


Concepts versus models in economic debate


The critique of bourgeois ideology begins with the critique of common sense

– Antonio Gramsci


What is unemployment?


On 20th August Clinton decreed a two-stage increase in the minimum wage, the first since 1989. Angus Deaton, William Church Osborn Professor of Public Affairs, Professor of Economics and International Affairs at Princeton University and generally considered a serious honcho on both sides of the pool, reported in October to the Royal Economic Society (of which he is a former president):

In Congress, the measure attracted bi-partisan support, as had previous minimum wage hikes. In the Senate, the bill was so popular that Republican Majority Leader, Trent Lott, held the measure back as a reward for his colleagues if they completed other measures before the summer recess. But the enthusiasm of the voters, 80 per cent of whom favoured an increase … is not echoed by the majority of American economists. Although many support an increase in the minimum, 90 per cent believe that raising the minimum wage will lead to higher unemployment.

The Clinton administration’s support for the measure leant on detailed empirical evidence compiled by David Card and by Paul Krueger, chief advisor to Senator Edward Kennedy. Their Myth and Measurement (1995), a detailed study of actual changes in the minumum wage, suggests these had little or no effect on the employment of low wage workers. Deaton describes their results as

convincing and straightforward, so much so that their import is clear to policy makers and to the media.

The US profession seemed strangely unmoved. ‘We have been disquieted,’ remarks Deaton,

by the level of public and private vituperation that has greeted [this] evidence. The reception accorded to the Princeton economists by their colleagues in other institutions is what might be expected by the friends and defenders of child-molesters, and the public outcry has been no less extreme.

Paul Craig Roberts used his regular Business Week column to demand the American Economic Association withdraw its most prestigious award – the John Bates Clark medal – from Card,

an economist who does not believe in the law of demand, the cornerstone of economic science

A belief is the cornerstone of a science? Card’s sin is not what he sees, says or does but what he thinks. Is this some accidental polemical excess? We don’t think so. It is the normal method of everyday economics and a natural consequence of its conceptual framework.

To what ‘demand’ does Roberts’ law apply? Like all economists he does not mean actual demand or actual supply, observed in the real economy. He means theoretical demand and theoretical supply, expressed in curves which – as Frisch stated when he formulated the identification problem – can never actually be observed. His ‘law’ refers to a hypothetical equilibrium that never happens. What we observe is ‘imperfect competition’, an ‘adjustment’, ‘imperfect information’, a ‘shock’ or ‘exogenous’ – any excuse to avoid calling it what it really is. The language speaks for itself. Who ever saw perfect competition? What information is perfect outside Nirvana? What defines Black Wednesday as ‘exogenous’? Adjustment towards what? The very words betray concepts defined by an ideal.

In short, the standards by which economics judges that 80% of the American people are wrong (we wonder what the Brewer criterion implies for this fact) is that what they actually observe in real life does not correspond to the purely ideal situation which is the stock-in-trade of the profession.

Roberts’ onslaught cannot be countered with another, alternative ideal model. This leads to a war of models; a theological dispute between two world systems neither of which connects up with the world we live in. The origin of the doctrinal method in economics is the method of debating around purely ideal models in which the variables are defined by the models instead of, as in all genuine sciences, the other way around. The response is to question the meaning of the terms. The refutation of Roberts is that his definition of unemployment is obscurantist, ideological and corresponds to nothing that actually happens to the good people of the USA.

Questioning the meaning of terms is not a substitute for empirical work; it is what empirical work ought to consist of. The first requirement of study is clearly to define the object being studied. The first requirement of measurement is to state what is being measured, which is not defined by the measurement. In short, a procedure does not define a concept.

Genuine empirical work prescribes a clearly defined relation between procedures and observables, sensuous aspects of reality which ordinary people can verify for themselves. This is what the model-builders and the datacrushers alike fail to do. Econometrics has become contentless world-building, Sim-City for the big boys. The issue is that when the people of the USA say they’re unemployed, Paul Craig Roberts says they ain’t. That not only gets the point across a damn sight quicker than fifty slick models, it is the correct scientific criticism to make.


Where do the unemployed come from? Early Keynesian debates


The definition of unemployment is a very old issue. In normal usage, it means what it says: there are people who are fit to work but don’t. Originally no clear distinction was made of ‘voluntary’ from ‘involuntary’ unemployment. According to Kahn (1976) Pigou introduced this in 1914 to distinguish between two kinds of inactivity: leisure, which was voluntary, and unemployment, which was not. ‘Involuntary’ unemployment thus meant ‘unemployment’. However Pigou defined unemployment using a distinctively subjective notion: it consisted of people who desired to work, rather than those capable of work. This is the basis of the textbook definition of the labour force as people ‘seeking work’.

As the boundaries of the welfare state fall back, layer after layer is redefined out of the labour force by successively more humiliating tests of ‘willingness’ to work.11 One only has to compare this with the criterion for the draft; if the workforce was extended to everyone who failed to prove a conscientious objection to work, it would undergo a miraculous expansion. In the apparently pedantic discussion over the word ‘employable’, we find that the lives of millions are at stake. So let us probe further.

The history of the concept is traced in a fascinating paper by Roberto Dos Santos.12 The puzzle facing Keynes and the ‘circus’ was as follows: they had to convince the profession that ‘equilibrium’ employment levels would never materialise. According to Keynes, Pigou’s definition admitted only one possible cause – when workers refused work at the current marginal product of labour in ‘real’ terms. He wished to show another possible cause – some kind of failure of co-ordination which stopped workers and entrepreneurs negotiating the money wage corresponding to the Pigovian ideal.

Actually, there are two ways to derive this conclusion. The most obvious is Marx’s. This is to assert that there is no reason equilibrium should ever be attained, and that any real economy persists in a state of permanent non-equilibrium. In Smithian terms, the hidden hand misses. Now, In Marx’s day no-one was inventive enough to speak openly of equilibria which did not really exist, so he did not define his concept as non-equilibrium. He simply stated the obvious, that a lot of workers were out of work.

Nevertheless, this is a non-equilibrium formulation. It says there is a permanent dynamic imbalance between the actual supply of labour and the actual demand for it; a visible stock of labour-power just like a visible stock of any excess commodity. But whereas excess in other markets can be liquidated, forcibly equating supply post hoc to demand, this is not yet a socially-acceptable method of disposing of excess labour (though the economists seem to be working on it). Therefore the visible expression of supply-demand imbalance, for the particular commodity labour-power, is a permanent excess or, as Marx put it, a reserve army of labour.

This is exactly how it first appeared to Keynes and the circus. They started from the obvious fact that for a prolonged period, workers could be unemployed even though, if the economy were to reach equilibrium, this excess stock of workers would be (theoretically) removed. In the first galleys of the General Theory ‘involuntary unemployment in the strict sense’ is counterposed to ‘so-called unemployment’. Keynes (1973:366) proposed the following definition:

Men are involuntarily unemployed if the supply of labour which is willing to work for a money wage whose value in terms of wage goods is equal to or lower than that of the existing money wage, is greater than the existing volume of employment

Though subjectivist, this is still the conceptual equivalent of Marx’s reserve army of labour. It is a straight excess of current supply over current demand under existing conditions. It means there are workers who aren’t working. It is a synonym for plain vanilla unemployment. Evidently Keynes changed this. The core concept of General Theory is a systemic incapacity, a feature of the system as a whole that cannot be overcome by private negotiations:

There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs (Keynes 1936:13)

And so in the General Theory (Keynes 1936:15) we find the following definition:

Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment

This is a different concept. It no longer speaks of what exists but of a possible alternative existence, which cannot be brought about through private bargains but only by a systemic change. Workers cannot negotiate a change in prices. Keynes now defines involuntary employment, not as the difference between the actual workforce and actual employment, but with reference to a hypothetical situation which might arise, were the price of wage-goods to change. The economy, he is saying, is in a non-full-employment equilibrium from which it may only be rescued by systemic changes.


Simultaneous causation and the origin of the doctrinal method in economics


Keynes’s final presentation makes the case harder to argue. It rests on proving that if there were a systemic adjustment then more people would get work. This requires the entire model to be accepted. The opposition, after some time, responded with alternative entire models. With the Keynesians out of power, their model cannot be tested and supply-siders can say that people queuing for jobs are not ‘really’ (i.e. ideally) employable. They can say that the money wage is too high; but this we can’t test because of the minimum wage. Instead of a clash between an ideal system and reality, we now have a doctrinal clash between two ideal systems. And when genuine empirical work intrudes, apoplectic fury.

Why did Keynes take this stand? In my view, because he wished to put another, very strong argument on the table in order to convince his profession. He wished to show that even using their approach, there might be a less-than-full-employment equilibrium. I think, and I do not mean this to be offensive, that he ducked the debate on method to win the debate about policy. This is not objectionable as an exercise in realpolitik, but it is not good science. Political expediency is not a source of knowledge; quite the contrary. That is why the debate still rumbles as to whether the essential basis of Keynes’s critique is a distinct low-employment equilibrium, or the non-existence of any equilibrium.



Marx’s view on this is unambiguous: Equilibrium Just Doesn’t Happen. Supply does not match demand. This is not because of price-stickiness, imperfections, trade unions, exogenous shocks or any other such daemonic influence. It is because equilibrium Just Ain’t So. This is the ground on which some critics are starting to stand, but which far too many refuse for the purely dogmatic reason that they are too scared to share it with the Savage Moor of Trier.

Simultaneism and subjectivism: the rocky road to a marriage made in heaven


The above history shows how two pillars of neoclassical economics – simultaneous causation and a subjective definition of key variables – came together. This is because, as Marshall observed, simultaneous causation is needed to support a subjective definition of value. The combination runs through all of economics. Let us retrace the history of the debate:

  1. the labour force is defined by marginalism in terms of desire instead of capacity.

  2. This demands a calculus of desires which, however, have no visible measure; we can observe only the outcome of their interaction with other desires. The observables of this calculus are not objects but outcomes. It begins to refer to ideal concatenations of objects in place of the actual objects.

  3. Material being becomes an alien threat in the brains of the economists. Production is an activity in time; but producers’ desires at the beginning are supposed to to express the consumer’s desires at the end. Causation must be reversed. Wages cannot be the result of work; work must be the result of wages. Heaven forbid, we might put the unemployed to work to create their own livelihood.

  4. Workers must now wait for Money to decree the wage that will call forth their desires. Since real causation does not work like this, it must be replaced by ideal causation in the economists’ heads; Marshall’s ‘simultaneous and mutual interaction of all factors’.

  5. But now the procedure for defining models from concepts is reversed: unemployment is redefined. Instead of the difference between ‘wanting’ and ‘getting’ work it becomes the difference between those working now and those who would be working in an ideal situation. It is no longer an observable, but is defined by the model and has become a purely doctrinal entity.

So it was that subjectivism met simultaneism on its way to heaven. The offspring of the union was, however, a new family of concepts. As before they refer to a state of consciousness. But this was originally in some sense directly accessible so that, for example, to find out if someone was employable, one asked them. Equilibrium concepts such as NAIRU are a new departure; they are defined by a non-observable ideal. Workers are never found in the actual state in which to observe whether they have become indolent burdens on the state. We shall never know if they would accept work at the market-clearing real wage, because we never get to try it.13 This is all wrapped up in ‘conventional good sense’ and learned lectures about about models, levels of abstraction and successive approximations which underwrite a hearty disdain for actually publishing or studying anything critical of this divine order. The outcome, however, is a purely doctrinal approach to reality.

The ideal, the real and the abstract in the standard interpretation


At first sight the standard interpretation of Marx is a direct negation of subjectivism, being defined in allegedly pure physical terms. In the next part of this paper we aim to show that through convergent evolution it has reached the same conclusions. Neoclassical marginalism begins from subjectivism and arrived at simultaneism; neoclassical Marxism, we want to demonstrate, began from simultaneism and arrived at subjectivism.

Since this will cause distress, can I first call attention to an important effect of simultaneous causation. In the the standard reading of Marx, price does not mean ‘price’. It does not have the normal, street meaning of the money paid for a thing or a service. It means ‘the theoretical rate of exchange which would be realised, were the economy to attain a steady state with supply equal to demand and the full mobility of capital’. Likewise profit does not mean ‘profit’. It has lost the normal business sense of the difference between gross worth in money terms at the beginning and the end of a period. It means ‘the profit which would be attained, were the economy to reach a steady state’ or more obscurely, ‘consumed inputs times one minus the reciprocal of the maximal eigenvalue of the technical coefficient matrix’.

Though this separation between real and ideal is exactly the same as in marginal theory, it is generally defended with different arguments, chiefly about appearance and essence. But this transforms the concept of ‘essence’ itself. In the standard reading, value – the ‘essence’ of price – does not mean ‘value’ in the street sense of the word. It means a theoretical rate of exchange realised in ‘a society in which each producer owns his own means of production and satisfies his manifold needs by exchange with other similarly situated producers’ (Sweezy 1970:23), or in some other society which would exist were the economy to attain a steady state with supply equal to demand and no mobility of capital, or were all sectors to have equal organic compositions, or were the profit rate to be zero. Essence so conceived is purely ideal; it refers to a hypothetical state of affairs, other than that which actually exists. It does not manifest itself in any actual object.

Neither Marx nor Hegel distinguished essence from appearance in this way. To say essence is concealed does not mean it is ineffable; it simply means one cannot understand it without thinking about it. To say the essence of food is nourishment does not mean the food gets eaten while the nourishment does not, as if the shops had a virtual shelf for intellectuals and a plebian shelf for the earthy bits. It means that to determine whether something really is food, one has to find out if it is nourishing; if one is not aware of this, one will miss a great deal of the point of food.14

The same mutation has taken place in the abstract-concrete distinction. To say that abstract labour is the essence of price does not mean that concrete labour is real work while abstract labour is not, or that the two happen in different places as if abstract labour were astral and concrete labour were earthly. It is necessary to emphasise this because many critics approach the issues we raise with minds conditioned by the neoclassical procedure of substituting the unmanifest ideal for the manifest real. From this standpoint they simply refuse to recognise that quite commonplace ideas might lie behind the concept of value. In seeking to demolish this lofty superstructure our project is not just iconoclastic. It supports a definite alternative paradigm which, we believe, also happens to be Marx’s. The significance of the new debate is not that it shows this paradigm to be ‘correct’ or the ‘direct line to Marx’. What it shows is that the paradigm is consistent. It therefore has a right to exist.

In what follows I shall assert, indeed insist, that very commonplace ideas lie behind the concept of value; that it is an actual and observable property of a really functioning economy and does not require an ideal or model either to define or quantify it, that it is clearly distinguished from price, and that the distinction is vital to the critique of political economy and the understanding of the world. Critics are entitled to disagree with this assertion; they are no longer entitled to dismiss it.




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